Creating an Estate Plan that includes a Revocable Trust, pour-over Will, Property Power of Attorney, Health Care Power of Attorney, Living Will, and Health Insurance Portability and Accountability Act Authorization provides numerous benefits during life and at death. During life, the plan provides directions to your family regarding your medical care and finances if you become incapacitated or are otherwise unable to articulate your wishes. At death, the plan acts as a set of instructions to your fiduciaries regarding the distribution of your assets. Unfortunately, as many practitioners understand, signing the documents alone does not solve every problem or guarantee that everything will work as intended. Sometimes, there are things that the grantor or testator does or fails to do that undermine an Estate Plan. The first part in this five-part series (Common Mistakes in Estate Planning – Part I) focused on the common blunders made by individuals seeking to shortcut the process of estate planning by failing to create a proper Estate Plan. The second part of the series explored mistakes that occur relating to the intended beneficiaries of the plan (Common Mistakes in Estate Planning – Part II). The third part focused on mistakes that usually result in litigation (Common Mistakes in Estate Planning – Part III). This fourth part in the five-part series will focus on the importance of using an attorney to prepare an estate plan and consulting the attorney at important benchmarks.
Some clients prefer to avoid hiring an attorney for estate planning and take matters into their hands by titling assets so that said assets pass outside of probate. Of course, clients have other ways to avoid using the services of an attorney. Numerous organizations such as Legal Zoom, RocketLawyer, and Will Maker all claim to permit an individual to create estate planning documents without hiring or consulting an attorney. Documents created using these services sometimes lack basic elements such as a residuary clause, fail to include lapse beneficiaries, or fail to meet the statutory requirements for validity. Any items not specifically devised by a Will or Trust, or things not owned at the creation of the documents pass pursuant to the terms of the residuary clause. If the documents do not contain the residuary clause, it’s not clear how those assets will pass. Likewise, if the Will or Trust fails to name lapse beneficiaries, that also causes problems. For example, if a specific devisee predeceases the testator or grantor and there’s no lapse beneficiary, then the assets pass to the residuary beneficiary which may or may not have been the grantor’s intent. If the residuary beneficiary predeceases the grantor and there’s no lapse beneficiary, or if the documents lack a residuary clause, that creates even more confusion. In situations in which the documents lack a residuary clause or lapse beneficiaries, the fiduciary likely would need to petition the court for an order directing the distribution of the assets. This causes a delay in the distribution of the assets along with increased expense for the estate ultimately reducing the amount passing to the beneficiaries.
Even if an individual retains the services of an attorney to create their Estate Plan, that’s not the end of the attorney’s role. The client should consult the attorney to update the plan whenever major life changes occur. The death of a spouse, being one of the most critical such life events. Upon the death of a spouse, the surviving spouse should contact an attorney to ensure proper administration of the estate and trust. If a client fails to contact an attorney upon the death of their spouse that can cause significant issues. For example, many estate plans utilize a “Family Trust” or “Credit Shelter Trust” to hold assets of the decedent spouse equal to their unused Applicable Exclusion Amount. Pursuant to Internal Revenue Code Section 2010, in 2022 an individual may transfer up to $12.06 million (the Applicable Exclusion Amount) upon their death without the imposition of transfer tax. An Estate Plan with a Family Trust requires the establishment of that trust as soon as practical after the death of an individual. If a Trustee fails to do this, said Trustee has breached their fiduciary duties to the beneficiaries of the Trust. Further, imagine the difficulty in trying to fund that Family Trust several years later when assets may have changed in value, been sold, or have otherwise been depleted.
Even if the decedent’s plan did not mandate the creation of a Family Trust, other decisions impact the estate and trust. For example, perhaps an intended beneficiary recently won the lottery. That beneficiary could disclaim an inheritance and let it pass to the next beneficiary under the plan. A qualified disclaimer under Internal Revenue Code Section 2518 allows an individual to refuse a gift or bequest without transfer tax consequence and must be made within nine months of the creation of the interest. A qualified Estate Planning attorney can walk an individual through the process and knows the requirements for a qualified disclaimer. Many plans that leave everything to a surviving spouse include disclaimer language that gives the surviving spouse the option to decide whether to disclaim assets and use the decedent spouse’s unused Applicable Exclusion Amount thereby saving estate taxes upon the surviving spouse’s later death. Again, the Trust and Estate practitioner can advise clients about whether this provision will benefit them.
As this article has demonstrated, a qualified Estate Planning Attorney needs to do more than simply create the Estate Plan. They play a vital role in advising the family through major milestones. Trust and Estate practitioners provide invaluable advice, especially upon the death of a spouse. Creating an Estate Plan without an attorney saves neither time nor expense, in fact, it’s likely to cost the family more in the long term. The next article will be the fifth and final in this series exploring common estate planning mistakes and how to fix them.
Tereina Stidd, J.D. LL.M.
Associate Director of Education
American Academy of Estate Planning Attorneys, Inc.
9444 Balboa Avenue, Suite 300
San Diego, California 92123
Phone: (858) 453-2128
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